Despite ROI Chatter, Marketers Still Pay Shops Same Old Way

ANA Survey Finds Fewer Than 1% of Advertisers Compensate Agencies Based on the Value They Bring

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CHICAGO (AdAge.com) -- Mega-marketers Coca-Cola and Procter & Gamble have taken major strides toward compensating their agencies based on the value they add to projects rather than the time they spend on them, but surprisingly few of their peers have followed their lead, according to a new survey by the Association of National Advertisers.

Value-based fees -- which compensate agencies according to an agreed-upon set of metrics for a given project -- now account for less than 1% of pay agreements, the survey found. Meanwhile, fee-based models, which supplanted commissions as the dominant means of agency compensation during the 1990s, have soared to an all-time high of 75% this year, up from 63% when the survey was last conducted in 2006.

That growth appears to have been fueled by the death of the old "15% commissions" model, which declined to 3% from 16% during the same period. Likewise, performance incentives, while quite prevalent, also dropped slightly, to 46% from 47%, said the study, which canvassed 75 major marketers with 1,039 agency relationships.

Industry executives queried about the results by Ad Age said they weren't surprised by the lack of progress. For one thing, the value-based models are onerous to construct, they said, and for another, the recession has created a climate in which clients are wary of paying bonuses to agencies that may hit every target and grow a client's market share even as its sales fall in a down market.

That's in addition to the fact that for all the debate about value-based compensation, there's still not enough clarity about how the arrangements work.

Confusion
"Part of the reason it's not taking hold is that people don't know really what it means," said Brad Brinegar, chairman-CEO of independent McKinney in Durham, N.C. "Knowing how to estimate the value created is difficult," said Mr. Brinegar, noting that clients "might agree that their business is a billion dollars bigger because of [their agency] but what percent are they going to hand over to us? How much of that should we rightly earn? Knowing how to compute that value is a barrier."

"This is one of those times when there's a lot of talk and very little progress," said Mike Lescarbeau, CEO at Interpublic's Carmichael Lynch, in Minneapolis, who says his agency's experience tracks with the study's results. "It's difficult to have it be a shared risk."

The highly publicized models offered by P&G and Coke both offer agencies an upside for results, to varying degrees. P&G's model pays agencies a fee that increases or decreases based on brand sales and market share and agency evaluations. Coke, for its part, covers its agencies' costs and offers them a profit margin of as much as 23% -- or as little as zero -- depending on how they perform in accordance with pre-determined metrics. But few other clients seem willing to follow suit.

"In too many cases, clients say 'value' but they mean 'cost,'" observed one senior agency exec who did not wish to be named. "I'm willing to give up a dollar [up front] if you tell me I can get three back if I deliver, but nobody's willing to do that."

Another thing that could be holding up the move to a new payment model? Procurement departments. "It can be hard for clients when procurement is involved; I think it's slowing down the process a bit," said Mr. Brinegar. Still, he's optimistic that even though the numbers don't yet point to a shift to new compensation models, groundwork for alternative models are being laid.

"What I would like to believe is just as it took the agency 30 years to get out of a commission system, we're in the middle of another shift ... 1% is the tip of the iceberg, and there's a lot of work going on beneath the surface in terms of moving the compensation conversation to a better place."

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